Brief analytical summaries or syntheses #56

Reducing waste in health care

Summary

A key target in slowing healthcare spending in the US is the elimination of waste, which is thought to constitute over one third of all American health spending. This policy brief published in Health Affairs focuses on the types of waste in health care and ways to eliminate it.

Background

Health care spending in the United States is widely deemed to be growing at an unsustainable rate, and policy makers increasingly seek ways to slow that growth or reduce spending overall. A key target is eliminating waste — spending that could be eliminated without harming consumers or reducing the quality of care that people receive and that, according to some estimates, may constitute one-third to nearly one-half of all US health spending. Waste can include spending on services that lack evidence of producing better health outcomes compared to less-expensive alternatives; inefficiencies in the provision of health care goods and services; and costs incurred while treating avoidable medical injuries, such as preventable infections in hospitals. It can also include fraud and abuse. This policy brief focuses on types of waste in health care, on ideas for eliminating it, and on the considerable hurdles that must be overcome to do so.

Analysis and results

The cost of waste

By comparing health care spending by country, the McKinsey Global Institute found that, after controlling for its relative wealth, the United States spent nearly $650 billion more than did other developed countries in 2006, and that this difference was not due to the US population being sicker. This spending was fueled by factors such as growth in provider capacity for outpatient services, technological innovation, and growth in demand in response to greater availability of those services. Another $91 billion in wasteful costs or 14 percent of the total was due to inefficient and redundant health administration practices.

Failures of care delivery

This category includes poor execution or lack of widespread adoption of best practices, such as effective preventive care practices or patient safety best practices. Delivery failures can result in patient injuries, worse clinical outcomes, and higher costs.

Failures of care coordination

These problems occur when patients experience care that is fragmented and disjointed — for example, when the care of patients transitioning from one care setting to another is poorly managed. These problems can include unnecessary hospital readmissions, avoidable complications, and declines in functional status, especially for the chronically ill.

Overtreatment

This category includes care that is rooted in outmoded habits, that is driven by providers’ preferences rather than those of informed patients, that ignores scientific findings, or that is motivated by something other than provision of optimal care for a patient. Overall, the category of overtreatment added between $158 billion and $226 billion in wasteful spending in 2011, according to Berwick and Hackbarth.

Administrative complexity

This category of waste consists of excess spending that occurs because private health insurance companies, the government, or accreditation agencies create inefficient or flawed rules and overly bureaucratic procedures. For example, a lack of standardized forms and procedures can result in needlessly complex and time-consuming billing work for physicians and their staff.

Pricing failures

This type of waste occurs when the price of a service exceeds that found in a properly functioning market, which would be equal to the actual cost of production plus a reasonable profit. For example, Berwick and Hackbarth note that magnetic resonance imaging and computed tomography scans are several times more expensive in the United States than they are in other countries, attributing this to an absence of transparency and lack of competitive markets. In total, they estimate that these kinds of pricing failures added $84 billion to $178 billion in wasteful spending in 2011.

Fraud and abuse

In addition to fake medical bills and scams, this category includes the cost of additional inspections and regulations to catch wrongdoing. Berwick and Hackbarth estimate that fraud and abuse added $82 billion to $272 billion to US health care spending in 2011.

Conclusion

Many of the measures described above are in process, although they are playing out at different rates in different regions and systems around the country. There are widespread concerns about how replicable and scalable some new payment models are, and how soon they will make a major difference in the way care is provided and in what amount. There are also cross-cutting trends, including consolidation of hospital systems and their employment of physicians, which could lead to the provision of more unnecessary services, not fewer. Efforts to extract waste from the health care system will in all likelihood continue along a range of federal government initiatives, including information technology adoption, pay-for-performance, payment and delivery reforms, comparative effectiveness research, and competitive bidding. Similar programs are also being initiated by state Medicaid agencies and by private payers. In the view of many experts, even more vigorous efforts to pursue the reduction of waste in health care are clearly warranted.

Implications and recommendations

In its September 2012 report, the IOM offered the following recommendations:

Improve providers’ capacity to collect and use digital data to advance science and improve care.

Involve patients and their families or caregivers in care decisions. Increasing comparative effectiveness research may help physicians, patients, and their families make more informed decisions.

Use clinical practice guidelines and provider decision support tools to a greater extent.

Promote partnerships and coordination between providers and the community to improve care transitions.

Realign financial incentives to promote continuous learning and the delivery of high-quality, low-cost care. Numerous efforts are underway among public and private payers to move from the traditional fee-for-service mechanism, which pays based on the volume of services performed, and toward those that pay based on value and outcomes.